Three Cheers for Alcohol Stocks

11/09/2016 8:00 am EST

Focus: STOCKS

Marshall Hargrave

Contributing Editor, Wyatt Investment Research

What’s interesting is that the alcohol stocks have long been great performers; they tend to do well regardless of the economy. People drink when times are good, and they drink when times are bad, observes Marshall Hargrave, editor of Daily Profit.

Investors now have a broad way to invest in the alcohol industry through a new ETF, the Spirited Fund/ETFMG Whiskey & Spirits ETF (WSKY).

The ETF's focus on distilleries makes sense; distilleries are higher margin and offer larger long-term returns than vineyards and related businesses.

But a note of caution is in order: the WSKY ETF charges a 0.75% management fee. So, instead of owning WSKY, there's nothing to stop investors from simply picking the best stocks from the portfolio.

Here are three top three alcohol stocks in the WSKY ETF for investors to consider:

Diageo (DEO)

The biggest component of the WSKY ETF is Diageo, which makes up nearly of a quarter of the ETF. The company’s key brands include Smirnoff, Ketel One, Johnnie Walker, Crown Royal and more.

One of Diageo's big draws is that it offers the highest dividend yield in the industry — coming in at 3.4%.Diageo has 27 years of dividend increases under its belt.

Diageo's earnings and revenue growth has been on the upswing for decades. Diageo owns some of the most recognizable beer brands in the world. This gives it a loyal following willing to pay a premium price for the brands, hence its strong pricing power.

Brown-Forman (BF.B

Brown-Forman, another major holding in the WSKY ETF, owns the Jack Daniels, Finlandia, Woodford Reserve and Canadian Mist brands.

Thanks to some minor challenges, now it’s also one of the cheapest of the alcohol stocks, trading at 18 times earnings.

Brown-Forman shares have been one of the worst performers in the industry; shares have tumbled 15% in the last year. The stock offers a 1.5% dividend yield

Brown-Forman's income and cash flow growth, though, remains strong. Earnings have grown at an average of 15% a year in the last five years. The company is expanding its product lines beyond its core whiskey brands. Hence, its vodka brand Finlandia is gaining traction in the marketplace.

Constellation Brands (STZ)

Constellation has brands like Robert Mondavi, Arbor Mist, Corona and Modelo. Unlike the other two companies, it focuses more on beer and wine. The company is over 70 years old, and has grown into one of the biggest breweries in the world.

Constellation Brands pays a near 1% dividend yield and has been a solid performer in the last year, with shares up 26%.

Constellation has been known for making savvy acquisitions over the years. These include its record purchase in the craft brew industry last year, its acquisition of Ballast Point Brewing for $1 billion. Now, Ballast is the fastest-growing craft beer company in the U.S.

All in all, alcohol stocks are still great investments that can outperform regardless of the economic backdrop. Cheers to these, the best picks in the Spirited Funds ETF.

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By Marshall Hargrave, Editor of Daily Profit

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